# **Exhibit 10.14**

# ** **

OPERATING AGREEMENT

 

OF

 

HEART LUNG INSTITUTE, LLC

 

This Operating Agreement (this “Agreement”)of The Heart Lung Institute, LLC (the “Company”) is entered into this 13th dayof October 1998, by and between The Heart and Lung Research Foundation, aUtah nonprofit corporation (“Foundation”), and MedQuest Products, Inc., aUtah corporation, (“MedQuest”), The parties to this Agreement shall also bereferred to individually as a “Member” and collectively as “Members.”

 

The Members hereby set forth the operatingagreement of the Company upon the terms, and subject to the conditions,contained herein.

 

ARTICLE 1

 

DEFINITIONS

 

As used in this Agreement, the following terms set forth in this Article Ishall have the following meanings:

 

“AAA” means the American ArbitrationAssociation.

 

“Act” means the Utah Limited LiabilityCompany Act.

 

“Affiliate” means any per directly orindirectly controlling, controlled by or under common control with anotherperson. For the purposes of this definition only, the term (i) “control”(including the terms “controlled by” and “under common control with”) means thepossession. direct or indirect, of the power to director cause the direction ofthe management and policies of a person, whether through the ownership of votingsecurities, by contact or otherwise and (ii) “person” means any naturalperson, partnership, corporation, limited liability company, association, trustor other legal entity.

 

“Agreement” means this OperatingAgreement of Heart Lung Institute, LLC.

 

“Assignee” means an entity in which atransfer of any Unit or Units which (i) with respect to the transferee ofsuch Unit has not been substituted as a Member in accordance with Section 7.3hereof and (ii) shall have only such rights with respect to such Unit orUnits as are set forth in Section 7.4 hereof.

 

“Business” shallhave the meaning given such term in Section 2.4.

 

“Capital Account”shall have the meaning provided in Section 6.1 hereof.

 

“Code” means theInternal Revenue Code of 1986, as amended from time to time or thecorresponding provisions of any successor statute and, to the extentapplicable, the Treasury Regulations.

 

“Company” means Heart Lung Institute,LLC a Utah limited liability company.

 

“Company Minimum Gain”shall have the ‘leaning ascribed to the term “Partnership Minimum Gain” inTreasury Regulation Section 1.704-2(d).

 

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“Confidential Information” shall havethe meaning given such term in Section 2.7 (a).

 

“Excluded Activities” mean thosebusiness activities and opportunities of each Member that are not subject tothe restrictions or the noncompetition provision set forth in Section 2.6hereof, as set forth on Exhibit B hereto (with respect to Foundation) and Exhibit Chereto (with respect to MedQuest), as such Exhibits may be amended from time totime.

 

“Exclusive License Agreement” or “MasterLicense” shall mean the agreement that transfers thetechnologies from MedQuest to the Company in exchange for Company Units.

 

“Exclusive Sublicense Agreement” shallmean the agreement that transfers the exclusive license to the technologies toMedQuest for the research, development and commercialization of thetechnologies in exchange for a royalty payment to the Company.

 

“Foundation” means The Heart and LungResearch Foundation, a Utah nonprofit corporation.

 

“Foundation Manager”shall have the meaning given such term in Section 3.4(a).

 

“Included Activities”means those activities that the Company intends to engage in, which is thefunding of the research, development, and commercialization of a magneticallysuspended ventricular assist device and artificial heart, as described inpatent applications numbered 08/850.156 Electromagnetically Suspended andRotated Centrifugal Pumping Apparatus and Method and 08/850.598 HybridMagnetically Suspended and Rotated Centrifugal Pumping Apparatus and Methodand enhancements thereof which specifically utilize magnetically suspendedimpellers.

 

“Member Nonrecourse Debt”shall have the meaning ascribed to the term “Partner Nonrecourse Debt’ in Section 6.3(b).

 

“Member Nonrecourse Deductions”shall have the meaning given to such term in Section 6.3(d)

 

“MedQuest” meansMedQuest Products, Inc., a Utah corporation.

 

“MedQuest Manager” shallhave the meaning given such term in 3.4(a).

 

“Member or Members”shall have the meaning given such term in the preamble.

 

“Net Profits” and “Net Losses”mean the income, gain, loss, deductions, and credits of the Company in theaggregate or separately stated, as appropriate, determined in accordance withthe method of accounting at the close of each fiscal year employed an theCompany’s information tax return filed for federal income tax purposes.

 

“Notice of Purchase”shall have the meaning given such term in Section 8.2

 

“Research Contract”shall mean the annual approved agreement between the Company and MedQuest forthe funding of the research, development and commercialization of the IncludedTechnology. The procedure for submitting, reviewing, and approving the ResearchContract shall be set forth in Licensing and Sublicensing Agreements executedsimultaneously with this Operating Agreement.

 

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“Securities Act” inthe Securities Act of 1933, as amended.

 

“Tax Matter Partner” shallhave the meaning given such term in Section 11.5

 

“Terminating Event”shall have the meaning given such term in Section 8.

 

“Terminating Member”shall have the meaning given such term in Section 8.1(c).

 

“Transfer” means any voluntary orinvoluntary sale, assignment, transfer, exchange, lease, mortgage, charge,hypothecation, pledge or other conveyance or encumbrance, including anytransfer by operation of law or otherwise. “Transfer” of a Unit does notentitle the transferee of such Unit to become a Member until the requirementsset forth in Section 7.3 hereof are satisfied.

 

“Treasury Regulations”  means the final or temporary regulations thathave been issued by the U.S. Department of Treasury pursuant to its authorityunder the Code and any Successor regulations.

 

“Unit” shall havethe meaning provided in Section 4.1 hereof.

 

ARTICLE 2

 

ORGANIZATION

 

Section 2.1. Formation TheMembers hereby agree to the formation of the Company as a limited liabilitycompany pursuant to the Act, as is currently in effect and as may be amendedfrom time to time. If there is a conflict between the provisions hereof and theAct, the provisions hereof shall control, unless the effect would be to exposeany Member or Manager to a liability of any kind or nature.

 

Section 2.2 Name. The Companyshall operate under the name “Heart Lung Institute, LLC” or such other name asthe Board of Managers from time to time may determine.

 

Section 2.3. Principal Place ofBusiness. The principal place or business of the Company shall be locatedat LDS Hospital, 8th Avenue & C Street, Salt Lake City, Utah 84143, orsuch other place of business as the Board of Managers from time to time maydetermine.

 

Section 2.4. Purposes. TheBusiness of the Company shall be to:

 

(a) engage in the solicitation andconsummation of securing the funds required to complete the researchdevelopment, and commercialization associated with the Included Activities in Article 1;

 

(b) contract to complete the research,development, and commercialization associated with the Included Activities asdefined in Article 1 (the parties understand and agree that such commercializationshall be performed by MedQuest);

 

(c) engage in other business activitiesapproved by the unanimous vote of the Board of Managers; and

 

(d) do any and all other acts and thingsincidental to those described in clauses (a) and (b) of Section 2.4.

 

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Section 2.5 Term  TheCompany shall commence as of the effective date of this Agreement and shallcontinue on into perpetuity, unless sooner terminated as set forth in Section 10.1hereof.

 

Section 2.6. Covenant not to Compete.   TheMembers shall not, during the term of this Agreement, directly or indirectly(including by or through any entity that is an Affiliate of a Member), in anymanner, invest in, or participate in the ownership, management, operation orcontrol of, any entity engaged in an activity as described in the IncludedActivities contained in Article I; provided, however, that nothingin this Section 2.6 shall be construed to limit in any way the ability ofthe Foundation or MedQuest or any Affiliates thereof to continue to engage inExcluded Activities or the ability to raise additional funding for IncludedActivities applicable to such Member or such Affiliate. To the extent that anyprovision of this Section 2.6 shall be deemed by a court of competentjurisdiction to exceed time or geographic limits or other limitations imposedby applicable law, then such provision shall be deemed reformed to the maximumtime or geographic or other (as the case may be) scope permitted by applicablelaw without affecting or rendering invalid or unenforceable the remaining termsand provisions of this Section 2.6.

 

Section 2.7. Confidential Information.

 

(a) Each Member recognizes that it willhave access to information of a proprietary nature relating to the includedActivities, including without limitation, documents, computer programs (whetheror not completed or in use), operating manuals and similar materials thatconstitute nonmedical systems policies, procedures and methods of doingbusiness developed thereby, administrative, advertising and marketingtechniques, and other proprietary information (including information relatingto financial matters) utilized thereby, all such information being referred toherein as Confidential Information. Each Member acknowledges and agrees thateach Member has a proprietary interest in its own Confidential Information andthat all such Confidential Information constitutes confidential and proprietaryor trade secret property.

 

(b) Each Member agrees to holdConfidential Information in strictest confidence and to not disclose suchConfidential Information or allow such Confidential Information to bedisclosed, directly or indirectly, during and after the term of this Agreementto any person or entity other than to such Member’s own employees agents,consultants and Affiliates on a “need to know” basis except as:

 

(i) required in government filings orjudicial, administrative or arbitration proceedings; or

 

(ii) otherwise required by law(including, without limitation, in response to a subpoena from a court or authorizedgovernmental agency); or

 

(iii) needed to obtain additionalfunding to complete the research, development. and commercialization activities

 

(c) No Member shall use any ConfidentialInformation of any other Member other than in connection with the Business ofthe Company.

 

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(d) Confidential Information shall notinclude the information which at the time of disclosure or thereafter becomespart of the public domain through no act or omission of a Member.

 

Section 2.8. Expenses of the Company.   Theresponsibility for all expenses incurred to operate this company shall bedetermined by the Board of Managers.

 

ARTICLE 3

 

MANAGEMENT

 

Section 3.1. Management of CompanyAffairs.  Pursuant to the Act, theCompany shall be managed by Managers, who shall perform their duties andresponsibilities under the Act thereunder and who shall exercise the powerdelegated to them solely through their representation on the Board of Managers.No individual Manager shall, unless so directed by the Board of Managers, haveauthority, rights or responsibilities hereunder. Subject to the provisions ofthe Act and any limitations in this Agreement relating to actions required tobe approved by the Members, all powers of the Company shall be exercised by orunder authority of, and the Company’s property and affairs shall be controlledby the Board of Managers. The primary functions of the Board of Managers shallbe to:

 

(a) establish policies for the directionand guidance of any committees established by the Board of Managers and anyofficers appointed by the Board of Managers; and

 

(b) to formulate the basic rules andregulations governing the operation and management of the Company. Nothing inthis Agreement is intended to preclude Managers from acting in any othercapacity outside of the Company, so long as acting in such other capacitiesdoes not constitute a Conflict of Interest with the Company.

 

The Managers shall devote such attention andbusiness capacity to the affairs of the Company as may be reasonably necessaryto fully perform their duties on the Board of Managers.

 

Section 3.2. Adoption of AnnualBusiness Plans. Subject to the unanimous approval of the Board of Managers,any officers appointed by the Board of Managers shall be responsible duringeach year for the preparation of an annual business plan. This business planshall be the guidelines for the activities of the Company during the Company’snext fiscal year.

 

Section 3.3 Member Actions

 

(a)           AnnualMeetings.  An annual meeting of theMembers shall be held at the date, time and place determined by the Board ofManagers to review the prior years operations, to discuss operations for thecoming year and to take up such other matters as may be properly raised at themeeting. Annual meetings of the Members may be held by conference telephone orsimilar communications equipment, so long as all members participating in suchmeeting can hear one another.

 

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(b)           SpecialMeetings.  Special meetings of theMembers may be called by any member. The Chairperson of the Board of Managersmay designate any place within or outside of Utah for any special meeting.Written or proper notice stating the place, day and hour of each specialmeeting and the purpose or purposes for which such meeting is called, shall bedelivered to each Member not less than five (5) days nor more than 60 daysprior to the meeting, in accordance with Section 12.5 hereof. Only thosematters specified in such notice shall be discussed at such specialmeeting.  Special meetings of the Membersmay be held by conference telephone or similar communications equipment, solong as all Members participating in such meeting can hear one another.

 

(c)           Actionat Member Meetings.  Unless otherwiseprovided by law or this Agreement, the affirmative vote of Members (owning atleast a majority of the Units) shall constitute the act of the Member at anymeeting of the Members. At all meetings of members, a member may vote by proxyexecuted in writing by the Member or by the Members duly authorized agent infact. Such proxy shall be filed with the Secretary of the Company before or atthe time of the meeting. No proxy shall be valid after eleven months from thedate of its execution, unless otherwise provided in the proxy. Each Unit shallbe entitled to one vote upon any matter submitted to a vote at a meeting ofMembers. The presiding officer or any Member may demand that voting be bysecret ballot.

 

(d)           WrittenConsent of Members .  Any act may betaken without a meeting if a consent in writing, setting forth the action so taken,is signed by all of the Members.

 

Section 3.4. Appointment of Board of Managers.

 

(a)           Numberof Managers. The authorized number of Managers shall be five and can onlybe altered by unanimous consent of all Members. So long as Foundation shall bea Member, the Foundation shall be entitled to appoint three Managers to theBoard of Managers (each such Manager being referred o herein as a “FoundationManager”). So long as MedQuest shall be a Member, MedQuest shall be entitled toappoint two Managers to the Board of Managers (each such Manager being referredto herein as a “MedQuest Manager”).

 

(b)           Appointmentand Removal of Managers.  Managersshall be appointed by written notice to the Board of Managers, by the Memberentitled to appoint such Manager, to hold office for an indefinite term. AnyManager nay be removed at any time, with or without cause, from the Board ofManagers by the Member that appointed such Manager.

 

(c) Vacancies

 

(i)            Anyvacancy in the Board of Managers shall be filled as directed by the Member whoappointed the Manager whose vacancy is being filled. A vacancy or vacancies inthe Board of Managers shall be deemed to exist:

 

(a) in the event or the deathresignation or removal of a Manager, or

 

(b) if the Board of Managers byresolution declares vacant the office of a Manager who has been declared ofunsound mind by an order of court or convicted of a felony or

 

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(c) if the authorized number of Managersshall be increased.

 

(ii)           AnyManager may resign effective upon giving written notice to all of the Managers(unless the notice specifies a later time for such resignation to becomeeffective). The Board of Managers shall provide a copy of such notice to allMembers. If the resignation of a Manager is to be effective at a time subsequentto the receipt of such notice, a successor may be appointed prior to theeffective date of the notice, to take office upon the effective date of suchnotice. Resignation as a Manager shall also constitute resignation as a memberof all committees, if any, appointed by the Board of Managers.

 

Section 3.5. Meetings of the Board of Managers.

 

(a)           General.   Regular meetings of the Board of Managers may be held at anyplace in Salt Lake City (or at such other place as may be agreed to by all theManagers) as is designated in the notice thereof (or, if not so designated insuch notice or there is no such notice, as designated by prior resolution ofthe Board of Managers). In the absence of such a designation, such regularmeetings shall be held at the principal executive office of the Company.Special meetings of the Board of Managers shall be held at any place in theSalt Lake City (or at such other place as may be agreed to by all the Managers)as is designated in the notice thereof (or, if not so designated in suchnotice, at the principal executive office of the Company).  Any meeting, regular or special, may be heldby conference telephone or similar communications equipment, so long as allManagers participating in such meeting can hear one another, and all suchManagers shall be deemed to be present in person at such meeting for allpurposes (including determining whether a quorum exists).

 

(b)           RegularMeetings.    Regular meetings of the Board of Managers shallbe held at such times as set forth in the notice thereof (or, if not so statedin such notice or there is no such notice, as designated by prior resolution ofthe Board of Managers).

 

(c)           SpecialMeetings.   Special meetings of the Board of Managers forany purpose or purposes may be called at any time by any Manager. Notice of(the time and place and purpose of each special meeting of the Board ofManagers shall be provided to each Manager not less than five (5) days normore than 60 days prior to such meeting, in accordance with section 12.5hereof.

 

(d)           Quorum.   Thepresence at a meeting of the Board of Managers of at least one FoundationManager and one MedQuest Manager shall be necessary for a quorum to transactbusiness at such meeting.  Every actiontaken or decision made by a majority of the Managers present at a meeting ofthe Board of Managers duly held and at which such a quorum is present shall beregarded as the act of the Board of Managers. Each Manager shall have the rightto authorize another Manager to act for such Manager at a meeting of the Boardof Managers by a written proxy signed by such Manager and filed with thesecretary prior to such meeting. A meeting of the Board of Managers at which aquorum is initially present may not continue to transact business in the eventthat the withdrawal of one or more Managers from such meeting results in aquorum no longer existing as described in this Section 3.5 (d).

 

(e)           Waiver of Notice.    Notice of a meeting of the Boardof Managers need not be given to any Manager who;

 

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(i) signs a waiver of such notice or awritten consent to the holding of such meeting or an approval of the minutesthereof (whether prior to or after such meeting) or

 

(ii) attends such meeting withoutprotesting, prior to or at the commencement of such meeting, the lack of noticeto such Manager, or

 

(iii) If a protest occurs, then theproposed meeting of the Board of Managers shall be rescheduled per notice asdescribed in Section 3.5 (c).  Allsuch waivers, consents and approvals shall be filed with the Company’s recordsor made a part of the minutes of such meeting.

 

(f)            Adjournment.   Amajority of the Managers present, whether or not a quorum is present, mayadjourn any meeting of the Board of Managers to another time and place. Noticeof the time and place of holding an adjourned meeting need not be given toabsent Managers if such time and place are fixed at such meeting adjourned; provided,however, that if such meeting is adjourned for more than 24 hours, noticeof any adjournment to another time or place shall be given prior to the time ofthe adjourned meeting to the Managers who were not present at the time of suchadjournment.

 

(g)           ActionWithout Meeting.   Any action required or permitted to betaken by the Board of Managers may be taken without a meeting, if all Managersto the Board of Managers consent in writing to such action. Such action byunanimous written consent shall have the same force and effect as a unanimousvote of the Board of Managers. Any such written consent or consents shall befiled with the minutes of the proceedings of the Board of Managers.

 

(h)           Feesand Compensation.   Managers and members of committees ofthe Board of Managers shall not receive compensation of their services from theCompany. If Board of Managers calls a meeting outside of Salt Lake City andattendance to that meeting is mandatory, each Manager will be reimbursed forreasonable travel expenses to attend said meeting. Managers may receive fairand reasonable compensation for services rendered in a capacity other than as aManager to the Board of Managers or a member of a committee thereof.

 

(i)            UnanimousVote Required.   Notwithstanding any other provisioncontained herein, no action shall be taken, sum expended or obligation incurredby the Company, or by the Board of Managers on behalf of the Company, withrespect to any of the following matters, unless such action shall have beenapproved by the unanimous vote of the Board of Managers

 

(i) The admission of additional Membersand matters relating to additional Members arising under this Agreement, exceptfor the conditions that may apply in Section 10.3 in which additionalMember may be added by majority vote

 

(ii) Any voluntary transfer of a directinterest in the Company

 

(iii) Any guaranty by the Company (orobligation that in economic effect, is substantially equivalent to a guaranty).

 

(iv) pledging, mortgaging, or grantingsecurity interest in the property or assets of the Company:

 

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(v) The appointment of the Company toperform such duties and carry out such responsibilities as the Board ofManagers shall determine:

 

(vi) Liquidation or dissolution of theCompany as provided in Article 10 hereof;

 

(vii) Merger, consolidation orcombination of the Company with another entity;

 

(viii) Sale, assignment, exchange lease,pledge or otherwise transfer or dispose of all or substantially all of theCompany’s assets;

 

(ix) A Member withdrawal or resignationfrom the Company prior to the dissolution and liquidation of the Company.

 

Section 3.6. Officers.  The Board of Managers may delegate theirmanagement responsibility but not their Board of Managers voting rights, toCompany officers as follows:

 

(a)           Officersof the Company.   The Board of Managers shall have theright, but not the obligation to appoint executive officers of the Companyincluding but not limited to a President, a Treasurer, and/or a Secretary. TheBoard of Managers may appoint such other officers as it deems necessary, whoshall have such authority and shall perform such duties as from time to timemay be prescribed by the Board of Managers.

 

(b)           Electionsand Term of Office.   Each officer shall be appointed by theBoard of Managers. Each officer shall hold office until a successor shall havebeen elected or until death or until such officer shall resign or shall havebeen removed in the manner hereinafter provided.

 

(c)           Removal.   Anyofficer or agent of the Company nay be removed by the Board of Managerswhenever in its judgment the best interests of the Company would be servedthereby.

 

(d)           Vacancies.   Avacancy in any office because of death, resignation, removal, disqualificationor otherwise, may be filled by the Board of Managers.

 

(e)           OfficersCompensation.   Officers compensation, if any, must beapproved by the Board of Managers.

 

ARTICLE 4

 

ADMISSIONS AND CAPITALCONTRIBUTIONS

 

Section 4.1 Capital.     The capital of the Companyshall be divided into units (referred to herein individually as a “Unit” andcollectively as “Units”) which shall not be evidenced by certificates issued bythe Company. The total equity ownership interest in the Company shall consistof 100 Units, ninety-nine (99) Units of which shall be issued to the Foundationand One (1) Unit which shall be issued to MedQuest.

 

Section 4.2. Contributions.

 

(a) Foundation Contributions.   Priorto August 1, 1998, the Foundation has made monetary contributions in theamount of $942,053, of which $830,153 has been paid to MedQuest and $111,900has been paid directly to the University of Virginia gift account.  It is the intent of the Foundation tocontribute up to an additional $2,057,947 to 

 

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the Company.  It is intended thata portion of the funding will be allocated to the Utah Artificial Heart Programunder a separate agreement subject to approval by the Board of Managers.  The Foundation also agrees to use reasonableefforts to raise additional funds to contribute to the Company. MedQuest is notobligated to accept any contributions. It is intended that any such additionalcontributions shall be made according to the Proposed Budget Estimate shown in Exhibit D,Table I. The Foundation shall have the right, but not the obligation, tocontribute additional amounts to the Company, but only with the consent of allof the Board of Managers.

 

(b)           Inthe event the purposes of this Agreement as stated in Section 2.4 and in Section 4.2are impossible for the Foundation to achieve, the Members agree to unwind thisOperating Agreement according to Subsections 4.4 below. The Members also agreeto unwind this Operating Agreement according to Subsections 4.4 below if it isdetermined by the IRS, or it is the opinion or nationally recognized taxcounsel, that this Operating Agreement or its continuation would, more likelythan not, constitute a potential threat to the tax-exempt status of theFoundation.

 

(c)           MedQuestContribution.   Simultaneously with the formation of theCompany, MedQuest shall transfer and contribute to the Company the intellectualproperly rights described in the “Exclusive License Agreement”, a copy of whichis attached as Exhibit A. Simultaneously with the execution of the Exclusive License Agreement,the Company shall execute an “Exclusive Sublicense Agreement” for the transferof research, development and commercialization rights to MedQuest, a copy ofwhich is attached to the Exclusive License Agreement.

 

Section 4.3. Transfer of Technology.  It is the understanding of the parties thatthe commercialization of the technologies will require additional investorfunds, it may be required by the investors to have technology ownership residein the commercialization entity, MedQuest. If the conditions of the investmentrequire this technology transfer of ownership, the Board of Managers will notunreasonably withhold the approval of such transfer to consummate theinvestment, provided that such proposed transfer would not be consummated if itis determined by the IRS or it is the opinion of nationally-recognized taxcounsel that the terms and conditions of the proposed technology transfer wouldjeopardize the tax-exempt status of the Foundation or compromise the intent ofthis Operating Agreement.

 

Section 4.4 Impossibility of Purpose

 

(a)           Uponthe determination by majority vote of the Board of Managers that the purposesof the Company as specified in Section 2.4, Section 4.2 and/or Section 10.1cannot be achieved or are the desire of the Board, the following shall occur:

 

(i) The Company shall return to MedQuestthe technologies identified in the Exclusive License Agreements as set faith inExhibit A hereto and shall relinquish all claims to the LicensedTechnology as defined in the Exclusive License Agreement and ExclusiveSublicense Agreement in Exhibit A. Then the Exclusive License andSublicense Agreements shall be null and void.

 

(ii) MedQuest shall return to Foundationits Unit ownership in the Company.

 

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(iii) Upon the completion of items (a)(i) and(a)(ii) of Section 4.4 the royalty payments as described in theExclusive Sublicense Agreement shall be paid by MedQuest directly to theFoundation per the Table in the Exclusive Sublicense Agreement.

 

(iv) The Company shall then beliquidated under Section 10.

 

ARTICLE 5

 

DISTRIBUTIONS

 

Subject to applicable law and any limitationscontained elsewhere in this Agreement, the Company from time to time may makedistributions as the Board of Managers shall determine. Distributions shall bemade among the Members in proportion to such Member Units.

 

ARTICLE 6

 

ALLOCATIONS

 

Section 6.1. Capital Accounts.   TheCompany shall establish an individual monetary capital account (“CapitalAccount”) for each Member. The Company shall determine and maintain eachCapital Account in accordance with Treasury Regulations Section 1.704-I(b)(2)(iv).

 

Section 6.2. Allocations of NetProfit and Net Loss.

 

(a) Net Loss. Net Loss shallbe allocated to the Members in proportion to the respective number of Unitsheld by each Member.

 

(b) Net Profit. Net Profit shallbe allocated to the Members in proportion to the respective number of Unitsheld by each Member.

 

Section 6.3 Special Allocations.   NotwithstandingSection 6.2,

 

(a)           MinimumGain Chargeback. If there is a net decrease in Company Minimum Gain duringany fiscal year, each Member shall be specially allocated items of Companyincome and gain for such fiscal year (and if necessary, in subsequent fiscalyears) in an amount equal to the portion of such Members share of the netdecrease in Company Minimum Gain that is allocable to decrease shall bedetermined in accordance with Treasury Regulations Section 1.704-2(g)(2).  Allocations pursuant to this Section 6.3(a) shall be made in proportion to the amounts required to be allocated toeach Member under this Section 6.3 (a). The items to be so allocated shall be determined in accordance withTreasury Regulations Section 1.704-2(f). This Section 6.3 (a) is intended to comply with the minimumgain chargeback requirement contained in Treasury Regulations Section 1.704-2(f) and shall be interpreted consistently therewith.

 

(b) Chargeback of Minimum GainAttributable to Member Nonrecourse Debt.   If there is a netdecrease in Company Minimum Gain attributable to a Member’s Nonrecourse Debt,during any fiscal year, each member who has a share of the Company Minimum Gainattributable to such Member Nonrecourse Debt (which share shall be determinedin accordance with Treasury Regulations Section 1.704-2(i)(5) shallbe 

 

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specially allocated items of Company income and gain for such fiscalyear (and, if necessary, in subsequent fiscal years) in an amount equal to thatportion of such Member’s share of the net decrease in Company Minimum Gainattributable to such Member Nonrecourse Debt that is allocable to thedisposition of Company property subject to such Member Nonrecourse Debt (whichshare of such net decrease shall be determined in accordance with TreasuryRegulations Section 1.704-2(i)(5). Allocations pursuant to this Section 6.3 (b) shall be made inproportion to the amounts required to be allocated to each Member under this Section 6.3(a). The items to be so allocated shall be determined in accordance with TreasuryRegulations Section 1.704-2(i)(4). This Section 6.3 (b) is intended to comply with the minimumgain chargeback requirement contained in treasury Regulation Section 1 .704-2(i)(4) andshall be interpreted consistently therewith.

 

(c)           NonrecourseDeductions.   Any nonrecourse deductions (as defined inTreasury Regulations Section 1.704-2(b)(l) for any fiscal year or otherperiod shall be specifically allocated to the Members in proportion, to thenumber of Units held by each Member.

 

(d)           MemberNonrecourse Deductions.   Those items of Company loss,deduction or Code Section 705(a)(2)(B) expenditures which areattributable to Member Nonrecourse Debt for any fiscal year or other periodshall be specially allocated to the Member who bears the economic risk of losswith respect to the Member Nonrecourse Debt to which such items areattributable in accordance with Treasury Regulations Section 1.704-2(I).

 

(e)           QualifiedIncome Offset.   If a Member unexpectedly receives anyadjustments, allocations, or distributions described in Treasury Regulation Section 1.704-l(b)(2)(ii)(d)(4),(5) or (6), or any other event creates a deficit balance in such MembersCapital Account in excess of such Members share of Company Minimum Gain, itemsof Company income and gain shall be specially allocated to such Member in anamount and manner sufficient to eliminate such excess deficit balance asquickly as possible. Any special allocations of items of income and gainpursuant to this Section 6.3 (e) shall be taken into account in computingsubsequent allocations of income and gain pursuant to this Article 6 sothat the net amount of any item so allocated and the income, gain, and lossesallocated to each Member pursuant to this Section 6.3 (e), to the extentpossible, shall be equal to the net amount that would have been allocated toeach such Member pursuant to the provisions of this Article 6 if suchunexpected adjustments, allocations, or distributions had not occurred.

 

Section 6.4. Code Section 704 (c) Allocations.   Notwithstandingany other provision in this - Article 6, in accordance with Code Section 704(c) and the Treasury Regulations promulgated thereunder, income, gain,loss, and deduction with respect to any property contributed to the capital ofthe Company shall, solely for tax purposes, be allocated among the Members soas to take account of any variation between the adjusted basis of such propertyof the Company for federal income tax purposes and its fair market value on thedate of contribution. Allocations pursuant to this Section 6.4 are solelyfor purposes of federal, state and local taxes. As such, they shall not affect,or in any way be taken into account in computing, a Members Capital Account orshare of profits, losses, or other items of distributions pursuant to anyprovision of this Agreement.

 

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ARTICLE 7

 

TRANSFERS OF MEMBERSHIPINTERESTS

 

Section 7.1 Restrictions on Transfer.  Subject to the terms and conditions of Section 7.4no Member may transfer any of its Units or enter into any agreement as a resultof which all Assignee may obtain Units held by such Member unless the transferor assignment of Units in the Company meets the terms and conditions of thisAgreement.

 

Section 7.2. Limitations on Rights ofAssignees.   The Transfer of Units in the Company shall be,and Assignee shall acquire any Transferred Units in the Company, subject to allof the terms and conditions of this Agreement. A Transfer of any Unit in theCompany shall not relieve the Transferring Member of its duties and obligationsto the Company unless all the Members agree in writing to release theTransferring Member therefrom.

 

Section 7.3. Admission of Transfereesas Members.   In the case of any Transfer of a Unit otherthan to another Member, the transferee of such Unit shall be admitted as aMember only upon

 

(a) the unanimous consent of the Boardof Managers, and

 

(i) by the Member with an amendment tothis Agreement,

 

(ii) by the Company and such transfereein a transfer Agreement, that will be completed by an officer or member of theBoard of Managers.

 

(iii) the execution of and delivery bysuch transferee of all such assumption, guarantee and other agreements as maybe necessary or appropriate in the judgment of the Board of Managers to putsuch transferee in the same position (pro rata, in accordance with the numberof Units held thereby) with respect to the Company as the existing Members(other than as otherwise specifically contemplated by this Agreement). Suchtransferee shall be treated as the owner of any such Transferred Unit, for thepurpose of allocating income, gains, deductions, credits and losses of theCompany, on the date upon which the conditions precedent to admission as aMember of the Company, set forth in this Section 7.3, have been satisfied.

 

Section 7.4. Rights of Assignees.   AnAssignee shall not be entitled to participate in or interfere with themanagement of the Company’s affairs (including by means of voting), receive anyinformation relating to transactions effected by the Company or inspect Company’sbooks or records. Such Assignee shall merely be entitled to receive, inaccordance with the terms of the Transfer of Units to such Assignee, thedistributions to which the Transferring Member otherwise would have beenentitled in respect to such Units. The original transferring Member retainsvoting rights unless changed by the unanimous vote of the Board of Managers.

 

Section 7.5. Securities Law TransferRestrictions.   All Members acknowledge that the Units havenot been registered under the Securities Act of 1933, as amended (the “SecuritiesAct”), in reliance on certain exemptions afforded thereunder. Notwithstandinganything contained herein to the contrary, the Members hereby agree that Unitsshall be not transferable and nonassignable, except in compliance with theregistration provisions of the Securities Act or pursuant to an exemption orexemptions therefrom and in compliance with applicable state securities lawsand rules and regulations promulgated 

 

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thereunder, and that any attempted or purported Transfer or assignmentin contravention thereof shall be void and of no effect. Accordingly, as acondition precedent to any Transfer of Units, the Board of Managers may requirethe Transferring Member to obtain and provide to the Board of Managers an opinionof counsel, reasonably satisfactory to the Board of Managers, that suchassignment or Transfer will be made in compliance with the registrationprovisions of the Securities Act or exemption therefrom, and in compliance withapplicable state securities laws and rules and regulations promulgatedthereunder.

 

Section 7.6. Resignation of Member   NoMember can resign without the approval of all Manager.

 

ARTICLE 8

 

PURCHASE OF UNITS ON THEOCCURRENCE OF CERTAIN EVENTS; RIGHT OF FIRST REFUSAL

 

Section 8.1. Grant of Option. EachMember hereby grants to the other Member the option to purchase, on the termsand conditions set forth in this Article 8, all of the Units held by suchMember upon:

 

(a) The Bankruptcy of such Member;

 

(b) The violation by such Member or anyshareholders, members or partners of such Member of Sections 2.6 or 2.7 hereof;or

 

(c) The gift, distribution, dividend,transferor other assignment of (in its by such Member in contravention of thisAgreement. (Each of the events referred to in clauses (a) through (c) ofthis Section 3.1 shall hereinafter be referred to as a “Terminating Event”and any such Member to which any of such clauses apply is referred to herein asa “Terminating Member”.)

 

Section 8.2. Exercise of Option.   Exerciseof the option granted in Section 8.1 hereof shall be effected by writtennotice (referred to herein as the “Article 8 Notice of Purchase”) to theTerminating Member or the Terminating Members authorized Manager or successor.In order to exercise such option, the Board of Managers must exercise suchoption within 60 days after receipt thereby or by its designee of actual noticeof the Terminating Event.

 

Section 8.3. Purchase Price. Atthe purchasing Member’s option, the purchase price for the Terminating Member’sUnits shall equal either:

 

(a) the amount by which ((1) exceeds(2), where (1) equals the distribution such Terminating Member would havereceived under Article 8 hereof, had all of the Company’s property beensold at such property’s book value by the Company on the last day of the monthin which the Terminating Event occurred, and where (2) equals theTerminating Members pro rata share of the debts and liabilities (including,without limitation, reasonable reserves for contingent liabilities) of the Companyexisting as of such date; or

 

(b) the most recent unit sales price ora prior transaction if one has occurred.

 

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Section 8.4. Payment of Option Price.Within 60 days after providing an Article 8 Notice of Purchase under Section 8.2hereof (or such later date as may be agreed upon by the Board of Managers andthe Terminating Member), the Board of Managers shall allow to be paid theamount owed to the Terminating Member either in:

 

(a) cash in an amount equal to the totalpurchase price to be paid for all of the Terminating Members Units or

 

(b) cash equal to an amount representingnot less than 10 percent of the total purchase price to be paid or all of theTerminating Member’s Units, together with a promissory note for the balance ofsuch purchase price,

 

(i) providing for at least equal annualpayments of principal over a period not to exceed five years from the date ofdelivery thereof and

 

(ii) bearing interest at a rate equal tothe lesser of the prime ending rate of First Security Bank or any successorentity plus two percent or the maximum rate permitted by law, compoundedannually, and payable annually together with one-fifth of the principal amount.

 

Section 8.5. Right of First Refusal.   Ifa Member receives a bona fide written offer from a third party to purchase itsUnits and the Member is willing to sell its Units on the terms of such offer,the selling Member must give notice of such offer and allow any other Memberthe First Right of Refusal to purchase the Units to be transferred on the exactterms and conditions set forth in the third party written offer. The noticemust specify the price and payment terms and indicate a closing date within 60days after the date the notice is delivered. The selling Member cannot sell itsinterest to the potential third party buyer or to any other buyer on terms thatdiffer in any way from the exact terms that were offered to the non-sellingMember.

 

(a) The purchasing Member must exercise itsright to purchase the Units by giving written notice to the selling Member orthe selling Member’s successor in interest (the Seller”) within 30 days of thedate of the receipt of notice.

 

(b) The price of the Units to be soldshall be an amount equal to the price offered for such Units by the thirdparty. The Board of Managers must approve the transaction price.

 

(c) Payment Terms.   Thepurchasing Member shall pay the purchase price in cash at the closing.  If the purchase price is payable on adeferred basis, the purchasing Member shall execute a promissory note in theprincipal amount of the purchase price having the same payment terms as setforth in the selling Member’s notice.  Ifthe purchase price is payable other than in cash, then, unless the partiesotherwise agree, the cash value of the purchase price shall be determined byarbitration and such cash value shall be paid to the selling Member at theclosing.

 

8.6 Only One Remaining Member.   If,as a result of the exercise of the option granted in Section 8.1 hereof,there remains only one Member then, after the payment of the purchase price asprovided in Section 8.4 hereof, the remaining Member will determinewhether the Company will continue in operation or will be Liquidated inaccordance with Article 10 hereof.

 

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ARTICLE 9

 

LIABILITY OF MEMBERS; INDEMNIFICATION

 

Section 9.1. Liability of Members.   TheMembers are not liable for any obligation of the Company (whether arising incontract, tort or otherwise) solely by reason of being a Member of the Company.

 

Section: 9.2. Indemnification.

 

(a) Any person or entity who was or isthreatened to be made a party to any threatened, pending or completed action,suitor proceeding whether civil, criminal, administrative or investigative(other than an action by or in the right of the Company) solely by reason of thefact that such person or entity is or was a Manager, Member, officer, employeeor agent of the Company, or is or was serving at the request of the Company asa manager, member, director, officer, employee or agent of another corporation,company, joint venture, trust or other enterprise (sometimes referred to hereinas an “Indemnified Party”), shall be indemnified by the Company againstexpenses (including attorneys fees), judgments, fines and amounts paid insettlement actually and reasonably incurred by such Indemnified Party inconnection with such action, suitor proceeding if such Indemnified Party actedin good faith and in a manner such Indemnified Party reasonably believed to bein or not opposed to the best interests of the Company, and with respect to anycriminal action or proceeding. had reasonable cause to believe such IndemnifiedParty acted in good faith and in a manner such Indemnified Party reasonablybelieved to be in or not opposed to the best interests of the Company, and,with respect to any criminal action or proceeding. had no reasonable cause tobelieve such Indemnified Party’s conduct was unlawful; provided, howeverthat

 

(i) the term nation of any action, suitor proceeding by judgment, order, settlement or conviction or upon a plea of *nolo contendere* or its equivalent, shall not, of itself,create a presumption that such Indemnified Party did not act in good faith andin a manner which such Indemnified Party) reasonably believed to be in or notopposed to the best interests of the Company or, with respect to any criminalaction or proceeding, that such Indemnified Party had reasonable cause tobelieve that such Indemnified Party conduct was unlawful and

 

(ii) no such indemnification shall bemade ill respect of any claim, issue or matter as to which such IndemnifiedParty shall have been adjudged to be liable for negligence or misconduct in theperformance of such Indemnified Party’s duty to the Company unless, and only tothe extent that, the court in which such action or suit was brought shalldetermine upon application that, despite the adjudication of liability but inview of all the circumstances of the case, such Indemnified Party is fairly andreasonably entitled to such indemnification.

 

(b) Any indemnification under clause (a) ofthis Section 9.2 (unless ordered by court) shall be made by the Companyonly as authorized in the specific case upon a determination thatindemnification if an Indemnified Party is proper under the circumstances,based on the applicable standard of conduct set forth in such clause (a). Suchdetermination shall be made by the majority vote of the Board of Managers.

 

(c) Expenses incurred by any IndemnifiedParty in defending a civil or criminal action, suitor proceeding may be paid bythe Company in advance of the final disposition of such action, suit orproceeding as authorized by the Members in the 

 

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specific case upon receipt of an undertaking by or on behalf of suchIndemnified Party to repay the amount of any such expenses so advanced unlessit shall ultimately be determined that such Indemnified Party is entitled to beindemnified by the Company as authorized in this Section 9.2.

 

(d) The indemnification pursuant to thisSection 9.2 shall not be deemed exclusive of any other rights to whichpersons or entities seeking indemnification may be entitled under any otheragreement or otherwise.

 

ARTICLE 10

 

DISSOLUTION AND LIQUIDATION

 

Section 10.1 Dissolution.   The Companyshall be dissolved upon the unanimous agreement of the Board of Managers

 

Section 10.2. Liquidation.   Inthe event of the dissolution of the company, the Board of Managers shallcommence to wind down the affairs of the Company. The assets of the Companyshall be liquidated and the proceeds thereof shall be paid (to the extentpermitted by applicable law) in the following order:

 

(a) Transfer and return of technologiesas provided in Article 4.4

 

(b) Payment of any debts or obligationsto third parties or the creation of any related reserves as may be necessary.

 

(c) Payment of any debts or obligationsto any Members,

 

(d) Distribution to Members as providedin Article 5

 

Section 10.3 Research, Developmentand Commercialization Responsibility. It is the intent of this Agreement tohave MedQuest complete the research, development and commercialization of theIncluded Activities in Article 1 except under the following conditions

 

(a) MedQuest files Chapter 7 bankruptcy,

 

(b) MedQuest violates any of the termsof section 2.6 and 2.7 of this Agreement.

 

(c) The Principal Investigator, specifically,Dr. James Long, and/or principals of the project whose leaving couldadversely affect the project viability, leave the project and MedQuest isunable to find, in a timely manner, a qualified replacement that meets thestandards approved by the Board of Managers. Any replacement for Dr. Long,and/or other principals must have majority approval of the Board of Managers.

 

(d) MedQuest has persistent failures inreaching the goals and milestones established in the annual Research Contractand MedQuest’s performance fails to meet standards established by the Board ofManagers as donned in the development of each year’s annual plan, which shallbe consistent with industry standards. If the Company can no longer participatein the funding agreed upon in the annual Research Contract, they must giveMedQuest six (6) months notice so that MedQuest can obtain other fundingto complete the Research Contract.

 

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(i) Failure to meet goals andmilestones, as defined in the annual plan(s), would not constitute a failureunder (d) above, if such failure were caused by such things as;

 

a) Acts of God,

 

b) Conditions of war,

 

c) Unanticipated regulatory changes

 

d) Failure of the Company to raise the fundsrequired to accomplish the performance expected as approved in the annualResearch Contract,

 

(e) MedQuest fails to remedy specificdeficiencies noted by the Board of Managers in a timely and reasonable mannerthat are consistent with industry standards.

 

(f) In the event that either (a), (b), (c) (d) or(e) above occur, then the Board of Managers by majority approval mayselect another party to complete the research, development, and/orcommercialization of the Included Activities in Article 1 under thefollowing terms:

 

(i) MedQuest shall return to the Companyits ownership Units;

 

(ii) The Company will retain technologylicense rights; and

 

(iii) The Company in return will payMedQuest a royalty rate equal to the greater of two percent (2%) or the averageof the obligations of MedQuest to the University of Utah and the University ofVirginia, not to exceed three percent (3%). In addition, the Company shall payto MedQuest a royalty rate equal to the royalty payments due from MedQuest tothe University of Utah and the University of Virginia, which MedQuest shallpromptly pay to the University of Utah and the University of Virginia and shallrequire those institutions to verify receipt of the same to the Company.

 

ARTICLE 11

 

BOOKS AND RECORDS, ACCOUNTING

 

Section 11.1 Records ThePresident or other designee of the Board of Managers shall keep at the Company’sprincipal place of business the following Company documents:

 

(a) A current list of the full name andlast known business or address of each member of the Board of Managers, of eachofficer and of each Member together with the contribution and the number ofUnits of each Member;

 

(b) A copy of the Articles ofOrganization, Board of Manager minutes, amendments, and resolutions of theCompany and all certificates of amendment thereto, together with executedcopies of any powers of attorney pursuant to which any such certificate hasbeen executed;

 

(c) Copies of the Company’s federal,state and local income tax information returns and reports (if any) or the sixmost recent tax years of the Company (or such lesser number of years as theCompany shall have been in existence);

 

(d) Copies of the original of thisAgreement and all exhibits and all amendments thereto;

 

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(e) Financial statements of the Companyfor the six most recent fiscal years of the Company (or such lesser number ofyears as the Company shall have been in existence); and

 

(f) The Company’s books and records asthey relate to the internal affairs of the Company for at least the current andpast three fiscal years (or such lesser number of years as the Company shallhave been in existence).

 

Section 11.2 Inspection – FinancialReports

 

(a)           Uponthe request of a Member, the President s promptly deliver to the requestingMember, at the expense of he Company, a copy of the information required to bemaintained by Sections 11.1, hereof.

 

(b)           EachMember has the right, upon reasonable request to obtain at the Company’sexpense, from the President, promptly upon availability, a copy of the Company’sfederal, state and local income tax or information returns for each year.

 

(c)           ThePresident, at the Company’s expense, shall promptly furnish to a Member a copyof any amendment to this Agreement executed by the Members, Board of Managersor an officer of the Company.

 

(d)           ThePresident, at the Company’s expense, shall send to each Member within 60 daysafter the end of each taxable year the information necessary for the Member tocomplete that Member’s federal and state income tax or information returns, andthere shall be included with such information a copy of the Company’s federal,state and local income tax or information returns for the year.

 

Section 11.3 Federal Income TaxElections.   All elections required or permitted to be madeby the Company under the Code shall be made by the Board of Managers with theapproval of the members.

 

Section 11.4 Election to Adjust Basis.   Inthe event of a distribution of property to a Member or the transfer of aninterest in the Company by sale, exchange or disposition, the Board of Managersmay, in its sole discretion, cause the Company to file an election under Section 754of the Code in accordance with the regulations issued thereunder to adjust thebasis of Company property in the manner provided for in Sections 734 and 743wof the Code.

 

Section 11.5 Tax Matters Partner.   TheFoundation is hereby designated as the “Tax Matters Partner” (as defined inCode Section 6231) to represent the Company (at the Company’s expense) inconnection with all examinations of the Company’s affairs by tax authoritiesand to expend Company funds for professional services and costs associatedtherewith.

 

Article 12

 

MISCELLANEOUS PROVISIONS

 

Section 12.1 Mediation andArbitration.

 

(a) Mediation.       In the event a dispute arises out of orrelates to this Agreement, the parties hereto agree first to try in good faithto settle such dispute through non-binding mediation under the commercialMediation Rules of American Arbitration 

 

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Association (the “AAA”). The parties will jointly assign a mutuallyacceptable mediator, seeking assistance in such regard from AAA if they havebeen unable to agree upon such appointment within 20 days from the conclusionof informal negotiations with respect to such dispute. The parties agree toparticipate in such mediation for a period of 30 days. The cost of such mediation,including fees and expenses, shall be borne by the parties.

 

(b) Arbitration. If there remainsany unresolved dispute arising out of or relating to this Agreement after theparties hereto shall have participated in mediation as provided in clause (a) ofthis Section 12.1, such remaining controversy or claims shall be submittedto a disinterested third party arbitrator which shall be:

 

(i) selected by mutual agreement of theMembers or

 

(ii) in the event the Members do notreach such an agreement regarding the selection of such arbitrator after a 60-dayperiod for good-faith negotiations has expired, then the AAA will appoint onewithin 30 days of such expired period. The arbitrator thus selected orappointed shall conduct the arbitration pursuant to the then current rules ofthe AAA.  The arbitrator shall begoverned by the provisions of this Agreement. The decision of the arbitratorshall be shared equally between the Members, and each Member shall bear its owncosts and attorney’s fees in any arbitration proceeding. The award of thearbitrator shall be final and may be enforced in a court having jurisdictionthereover.

 

(c) Waiver of Partition.   EachMember hereby waives and renounces any right to seek a court decree ofdissolution or partition or to seek the appointment by a court of a liquidatorfor the Company. Dissolution and liquidation are described in Article 10this Agreement.

 

(d) Right to Distribution in Kind.   TheMembers shall have no right to demand or receive any part property upon dissolutionand liquidation of the Company pursuant to Article 10 hereof or to demandthe return of their capital contributions to the Company. The Property to bereceived by any Member upon such dissolution and/or liquidation of the Companyshall be determined by the Board of Managers except as otherwise presented inthis Agreement or the Exclusive License or Exclusive Sublicense Agreements.

 

Section 12.2 Integrated Agreement.   ThisAgreement constitutes the entire agreement of the parties with respect to the subjectmatter hereof and replaces and supersedes all prior agreements, understandingsand negotiations of the parties, whether written or oral.

 

Section 12.3. Binding Agreement.   ThisAgreement shall be binding upon the executors, administrators, estates, heirsand legal successors of the parties hereto.

 

Section 12.4. Governing Law.   Exceptas otherwise specifically provided, this agreement and all questions arisinghereunder shall be determined in accordance with the laws of the State of Utah.

 

Section 12. 5. Notices.   Allnotices, offers and acceptances and other communications hereunder shall be inwriting and shall be delivered in person, by telecopy (with confirmation) or byovernight delivery service (with receipt), or shall be 

 

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deposited in the United States mail (postage prepaid) by certified orregistered mail (return receipt requested) to

 

(a) in the case of any suchcommunication to a Member, the address for such Member set forth in Exhibit Eattached or at such other place as such Member may designate by written noticeto the Company and the other Member or Members or

 

(b) in the case or any suchcommunication to a Manager, the address of such Manager appearing on the booksof the Company or provided by such Manager to the Company for the purpose ofreceipt of notices.

 

A notice shall be deemed received:

 

(i) if by personal delivery, on the datedelivered, 

 

(ii) if by telecopy. on the dateconfirmed,

 

(iii) if by overnight delivery service,on the date delivered and

 

(iv) if by mail, three days aftermailing.

 

Section 12.6. Counterparts ThisAgreement may be executed in multiple counterparts.

 

ARTICLE 13

 

AMENDMENTS

 

This Agreement may be amended by unanimousapproval by the Members from time to time by a written instrument signed by theCompany and all of the Members. The President shall amend Schedule Fattached hereto to reflect admissions and withdrawals of Members, Transfers ofUnits, capital contributions (including tax basis and agreed-upon value) andany repurchase by the Company of Units.

 

Each of the Members has caused this Agreementto be executed as of the date first written above.

 
| THE HEART AND LUNG RESEARCH FOUNDATION | MEDQUEST PRODUCTS, INC. |
|----------------------------------------|-------------------------|
|                                   |                    |   |
| BY:                                    | Johan Crawford          |   | By: | Pratap Khanwilkar |   |
|                                   |                    |
| Name: Johan Crawford                   | Name: Pratap Khanwilkar |
|                                   |                    |   |
| Title: President of  Chairman of Board | Title: President        |
|                                        |                         |  |  |  |  |  |

 

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Exhibit A

 

EXCLUSIVE LICENSE AND EXCLUSIVESUBLICENSE AGREEMENTS

 

EXCLUSIVE LICENSE AGREEMENT

 

Between

 

MedQuest as Licensor and theHeart Lung Institute as Licensee

 

This Exclusive License Agreement (Agreement)made and entered into this              dayof October, 1998, is by and between MedQuest Products, Inc. (hereinafter “MedQuest”),having a principal place of business at 825 North 300, Suite #107, SaltLake City, Utah 84103 and The Heart Lung Institute (LLC) (hereinafter ‘Licensee’)having a principal place of business at 8th Avenue and C Street, Salt LakeCity, Utah 84143.

 

**Recitals**

 

A.            MedQuestis the owner of certain technology and patent rights, as described below; and

 

B.            MedQuestis willing to grant to Licensee an exclusive, worldwide right and license touse such technology and patent rights subject to the terms and conditions setforth herein; and

 

C.            Licenseedesires to obtain such license to use technology and patent rights upon suchterm and conditions.

 

NOW THEREFORE, for and in consideration ofthe foregoing premises, the mutual covenants and agreements set forth below,and other good and valuable consideration, the receipt and sufficiency of whichare hereby acknowledged, the parties hereby expressly agree as follows:

 

**AgreementTerms**

 

1.             Definitions

 

1.1           Theterm “Licensed Technology” shall mean all technology, technical - data, tradesecrets, inventions (whether patentable or not), designs, devices, models,know-how and other confidential and proprietary information relating tomagnetically suspended ventricular assist device (VADs) and the artificialheart (TAH), including all rights arising under patent, copyright, trademark,trade secret, and contract laws relating thereto during the term of thisAgreement.

 

1.2           Theterm “Patent Rights” shall mean any rights in applications for -United Statespatents, applications for foreign patents, any patents granted on United Statesor foreign applications, and any continuations, continuations-in-part,divisions, or reissues relating to the Licensed Technology, including patentapplication number 08/850,156 entitled “Electromagnetically Suspended andRotated Centrifugal Pumping Apparatus and Method” and patent application number08/850,598 entitled “Hybrid Magnetically Suspended and Rotated CentrifugalPumping Apparatus and Method”, and enhancements thereof which specificallyrelate to magnetically suspended impellers.

 

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1.3           Theterm “Field” shall mean the use of magnetically suspended impeller VADs and TAHtechnologies directed toward treatment of heart disease.

 

1.4           Theterm “Master License” shall mean this Exclusive License Agreement whichtransfers the technologies from MedQuest to the Licensee in exchange forLicensee Units.

 

1.5           Theterm “Research Contract” shall mean the annual approved agreement between theLicensee and MedQuest for the funding of the research, development andcommercialization of the products incorporating Licensed Technology.

 

2.             Grant of License

 

MedQuest hereby grants to Licensee, andLicensee hereby accepts from MedQuest, upon the terms and conditions set forthin this Agreement, an exclusive right and license with the right to sublicense,make, use, sell, offer to sell, import, and export, the Licensed Technology andPatent Rights and to provide funding to further the research, development andcommercialization of the Licensed Technology and the Patent Rights in theField.

 

3.             Licensee FundingObligation and Engagement of MedQuest to Perform R&D

 

3.1           Aproposed Research Contract will be submitted by MedQuest to the Licensee by June 1stof each year that it is applicable and the Licensee will review for approvalsaid Research Contract by June 15th of that year to allow for disbursementof funds to begin by January 1st of the next calendar year. For the year1998, the Research Contract for the next fifteen month period will be submittedby MedQuest to HLI by October 22, 1998 for review. Upon HLI’s approval ofResearch Contract, HLI will allow for the disbursement of funds for the fourthquarter (4th) by November 5, 1998.

 

3.2           Licenseeintends to make available a minimum of $3,000,000 and intends to fund furtherresearch, development, and commercialization of the Licensed Technology andshall engage MedQuest to provide such research and development activities,pursuant to the terms of a Sponsored Research Contract which will be preparedby MedQuest and subject to the approval annually by the Licensee. Pursuant tothe terms of the Research Contract, Licensee intends to provide to MedQuest thedesignated funds already raised and any additional funds raised for thispurpose up to a maximum contemplated amount of $56,000,000 to fund theresearch, development, and commercialization activities contemplated onLicensed Technology. MedQuest is not obligated to accept any additional contributionsabove the funds already paid to MedQuest.

 

3.3           TheLicensee is not obligated to fund the entire fifty-six million dollars.

 

3.4           Inconsideration for such payments, MedQuest will provide such specific technologyresearch, development, commercialization, management, marketing and salesactivities described in the Research Contract or otherwise agreed upon by theparties.

 

3.5           Theresults of the research and development activities pursuant to the ResearchContract including inventions and innovations applicable to the exploitation ofthe Licensed Technology in the Field, shall be owned by MedQuest, and anyassociated 

 

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entity that participates in the development, and Licensed to Licenseepursuant to the terms of this Agreement.

 

3.6           Theproposed budget for the funding advances to be made from Licensee to MedQuestand the nature of the services associated with such payments are presented inthe Table 1 below, and will be detailed annually in the Research Contract. Itis understood and agreed that Licensee may fund the budget only to the extentof the funds it actually raises for this purpose, and only as agreed to in theapproved Research Contract.

 

3.7           Fundingamounts will be advanced or disbursed to MedQuest in increments on a quarterlybasis or as needed and requested by MedQuest for project work completed or tobe performed by MedQuest and its associates pursuant to the terms of theResearch Contract and consistent with the annual budgets submitted by MedQuest.MedQuest will submit quarterly reports to Licensee by the 20th of the followingmonth after the end of each calendar quarter during the term of the Agreement.It is currently anticipated and estimated that advances will be made in theamounts and for the purposes referenced in Table 1 below.

 

3.8           Disbursementsfrom Licensee to MedQuest will be made by the first day of the first month ofeach quarter or if that falls on a weekend or holiday; then the precedingbusiness day.

 

**Table 1 Proposed Budget Schedule of Estimated Funding Required forCommercialization**

 
| **YEAR** | ** ** | **VAD  BUDGET** | ** ** | **VAD  STATUS** | ** ** | **TAH  BUDGET** | ** ** | **TAH  STATUS** | ** ** | **COMBINED  BUDGETS** | ** ** | **CUMULATIVE  BUDGETS** | ** ** |
|----------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------------|------------|-------------------------|------------|
| 1997     |       | 400,000         |       | R&D         |       | 0               |       |            |       | $                     | 400,000    |                    | $          | 400,000 |   |
| 1998     |       | $               | 3,290,144  |            | R&D    |            | 0          |            |       |                  | $          | 3,290,144               |       | $ | 3,690,144 |   |
| 1999     |       | $               | 4,412,229  |            | R&D    |            | $          | 591,559         |       | R&D               |       | $                       | 5,003,788  |   | $ | 8,693,932 |   |
| 2000     |       | $               | 5,859,605  |            | R&D    |            | $          | 1,460,042       |       | R&D               |       | $                       | 7,319,647  |   | $ | 16,013,579 |   |
| 2001     |       | $               | 5,510,998  |            | IDE        |            | $          | 3,180,287       |       | R&D               |       | $                       | 8,691,265  |   | $ | 24,704,844 |   |
| 2002     |       | $               | 6,352,544  |            | IDE        |            | $          | 3,349,120       |       | IDE                   |       | $                       | 9,701,664  |   | $ | 34,406,508 |   |
| 2003     |       | $               | 6,921,721  |            | PMA        |            | $          | 3,572,982       |       | IDE                   |       | $                       | 10,494,703 |   | $ | 44,901,211 |   |
| 2004     |       | $               | 7,508,744  |            | PMA        |            | $          | 3,563,306       |       | PMA                   |       | $                       | 11,072,050 |   | $ | 55,973,261 |   |
| TOTAL    |       | $               | 40,255,985 |            |       |            | $          | 15,717,276      |       |                  |       | $                       | 55,973,261 |   | $ | 55,973,261 |   |
|     |       |            |       |            |       |            |       |            |       |                  |       |                    |       |   |   |   |   |

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R&Dmeans research and developmentIDE means Investigational Device Exemption for limited clinical trials aspermitted by the FDAPMA means the Premarket Approval for nationwide sales for clinical use asgranted by the FDA

 

4.             Consideration toMedQuest

 

4.1           Inconsideration for the license granted to Licensee pursuant to Section 2 ofthis Agreement:

 

(a) Following the signing of thisagreement, Licensee shall review MedQuest’s Research Contract within 15 days ofreceipt of said Research Contract. The

 

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Research Contract will cover the next 15 month period (October 1,1998 through December 31, 1999) or that period following approval of theResearch Contract through December 31, 1999, whichever is less). TheResearch Contract will include information and milestones for establishingperformance criteria.

 

(b) Licensee intends to provide MedQuestwith the funding it receives for the purpose to complete the research,development and commercialization of the Licensed Technology, in accordancewith the terms of this Agreement and the Research Contract.

 

(c) Licensee will grant an exclusive,worldwide right and sublicense to use, research, develop, and exploit theLicensed Technology in the Field, in the Exclusive Sublicense Agreementattached in Exhibit A.

 

(d) MedQuest will be granted a one unitinterest in the LLC.

 

5.             Representationsand Warranties of MedQuest

 

5.1           MedQuestrepresents and warrants that it has obtained and/or will obtain all necessaryassignments, licenses and rights associated with the designated patentapplications included within the definition of Patent Rights herein, from thevarious inventors and Universities holding rights thereto to carryout thepurposes of this Agreement and of the Operating Agreement entered into by theparties, with the agreement that such inventors and rights holders willcooperate in MedQuest’s acquisition and enforcement of the intellectualproperty rights related thereto. MedQuest will assign interest in the PatentRights and Licensed Technology to the Licensee prior to entering into theResearch Contract.

 

5.2           MedQuestwarrants that it owns, has control, and authority to grant Licensed Technologyand Patent Rights set forth in Sections 1.1 and 1.2 respectively.

 

5.3           MedQuestwarrants that it will diligently proceed to protect all Patent Rights andLicensed Technology Rights throughout the world.

 

5.4           Licenseehereby represents to MedQuest and MedQuest hereby represents and warrants toLicensee as follows:

 

(a) it is a corporation duly organized,validly existing, and in good standing under the laws of its respectivejurisdiction of incorporation;

 

(b) it has the power and authority toown, lease, and operate its assets and to carry on its activities as it is nowbeing conducted and has the full power and authority to enter into thisAgreement and to performing its obligations hereunder;

 

(c) the execution and delivery of thisAgreement and the performance by it of its obligations under this Agreementhave been duly and validly authorized and approved by all requisite action, andno other acts or proceedings on its part are necessary to authorize theexecution, delivery, and performance by it of this Agreement or thetransactions contemplated hereby;

 

(d) this Agreement constitutes itslegal, valid, and binding obligation and is enforceable against it inaccordance with its terms, except to the extent that - enforcement may belimited by general principles of equity, regardless of whether considered-in aproceeding at law or in equity;

 

----

 

(e) no consent, approval, nondisapproval,authorization, ruling, order of, notice to, or registration with anygovernmental authority or any person, partnership, corporation, firm, trust, orother entity is required on its part in connection with the execution anddelivery of this Agreement or the consummation by it of the transactionscontemplated hereby; and

 

(f) the delivery and performance of thisAgreement by it are not restricted by or in violation of any applicable law towhich it is subject or by any agreement, commitment, order, ruling, orproceeding to which it is a party or to which it or any of its assets aresubject.

 

5.5           MedQuesthereby represents and warrants to Licensee as follows:

 

(a) MedQuest knows of no third-partyrights in or claims to the Licensed Technology or the Patent Rights, other thanthe University of Utah and the University of Virginia, nor is MedQuest aware ofany challenge to the validity of its rights to the Licensed Technology or thePatent Rights;

 

(b) MedQuest has executed no otherAgreement in conflict with this Agreement;

 

(c) MedQuest is not aware of anychallenge to its co-ownership of the Patent Rights or any right in the LicensedTechnology;

 

(d) the execution and performance ofthis Agreement and the license contained herein will not violate, conflictwith, or result in any breach of any of the provisions of, or constitute adefault under, any other agreement, instrument, document, or other obligationto which MedQuest is a party, or by which it is bound, or any decree, law,judgment, order, statute, rule or regulation applicable to MedQuest;

 

(e) MedQuest is not aware of any thirdparty claims, asserted or threatened, that the development of productsutilizing the Licensed Technology will infringe upon the rights of said thirdparty; and

 

(f) To the best of MedQuest’s knowledge,the Licensed Technology and Patent Rights are not publicly or generally knownor available and have been, and will continue to be maintained and safeguardedas trade secrets until, in the case of Patent Rights or trademarks applied forat, issued by, or published by, the U.S. Patent and Trademark Office or aforeign patent or trademark office.

 

5.6           MedQuestshall indemnify and hold Licensee harmless, against any claim that the issuedPatent Rights infringe a valid patent or in the event of a misrepresentationmade in Section 5.5, above.

 

The Parties agree that any breach of any ofthe representations and warranties set forth in any of Section 5.1 to 5.6shall be considered a material breach of this Agreement.

 

6.             Patents andInfringement

 

6.1           Includedwithin the Research Contract will be the details of the costs and expensesrelated to the filing, prosecution and maintenance of United Slates and foreignpatent applications with respect to the Licensed Technology and such responsibilityto pay for these costs will not be transferred to MedQuest hereunder. MedQuestreserves the 

 

----

 

right to complete such protection mechanisms for the LicensedTechnology as it may determine to be appropriate to protect the intellectualproperty rights of the Licensed Technology.

 

6.2           Ifit is believed in good faith that the Patent Rights or other intellectualproperty rights relating to the Licensed Technology are being infringed by athird party, the party to this Agreement first having knowledge of suchinfringement shall promptly notify the other in writing, which notice shall setforth the facts of such infringement in reasonable detail. Licensee shall havethe right, but not the obligation, to institute and prosecute at its ownexpense any such infringement of the Patent Rights or other intellectualproperty tights. If Licensee fails to bring such action or proceedings within aperiod of three (3) months, after receiving written notice or otherwisehaving knowledge of such infringement, then MedQuest shall have the right, butnot the obligation, to institute and prosecute at its own expense any suchinfringement of the Patent Rights or other intellectual property rights.Recovery of damages and costs in such suit shall be apportioned as follows: Theparty bringing the suit shall first recover an amount equal to two (2) timesthe cost and expense incurred by such party directly related to the prosecutionof such action and the remainder shall be divided equally between MedQuest andLicensee.

 

7              Termination

 

7.1           Unlessearlier terminated as provided herein, with respect to the Patent Rights, thisLicense Agreement shall extend for the life of the last to expire patent issuedon the Patent Rights and shall then expire automatically. With respect to theLicensed Technology other than the Patent Rights, this Agreement shall continuein full force and effect for a period of twenty (20) years from the date ofthis Agreement. Not withstanding this clause, the royalty payments associatedwith the Exclusive Sublicense Agreement will continue as long as productsincorporating the Licensed Technology are being commercialized.

 

7.2           Inthe event of the default or failure by either party to perform any of theterms, covenants or provisions of this License Agreement, the non-performingparty shall have sixty (60) days after the giving of written notice by theother party of such default within which to correct such default. If suchdefault is not corrected within the said 60- day period after notice, theperforming party shall have the right at its option to cancel and terminatethis Agreement. Either party shall have the right at its option to cancel andterminate this Agreement in the event that the other party shall becomeinvolved in insolvency, dissolution, Chapter 7 bankruptcy or receivershipproceedings affecting the operation of its business or in the event that theother party shall discontinue its business for any reason. In the event oftermination of this License Agreement except pursuant to Paragraph 7.1, allrights licensed herein will be vested in the performing party.

 

7.3           ThisAgreement shall automatically terminate in the event of a liquidation orwinding up of Licensee.

 

8.             Assignability

 

This Agreement shall be binding upon and inure to the benefit ofMedQuest and its assignees and successors in interest and shall be binding uponand inure to the benefit of 

 

----

 

Licensee and any successor to its entire business but shall nototherwise be assignable or assigned by either party without prior approval ofthe other party being first obtained in writing, which approval shall not beunreasonably withheld.

 

9.             Governing Law

 

This Agreement shall be construed according to the laws of the State ofUtah and any and all disputes hereunder shall be resolved in the appropriatestate or federal courts sitting in the State of Utah. The parties hereto agreeto the jurisdiction of, and to venue in, such courts.

 

10.           AdditionalProvisions

 

10.1         Theparties hereto agree that neither will use the names of the other on any logotype or symbol associated with any publication, research, promotion, marketingsale or advertisement in connection with the Licensed Technology without theprior written consent of the other.

 

10.2         Theparties agree that the Licensed Technology to which this Agreement relates isconfidential and each party agrees to use reasonable efforts to maintain theconfidentiality of non-public information and to maintain the subjecttechnology in confidence and to use the same only in accordance with this Agreement.Such obligations of confidentiality shall not apply to information which eitherparty can demonstrate: (i) was at the time of disclosure in the publicdomain; (ii) has come into the public domain after disclosure through nofault of such party; (iii) was known to such party prior to disclosurethereof by the other party; or (iv) was lawfully disclosed withoutobligation of confidence by a third party which was under no obligation ofconfidence.

 

The foregoing obligations of confidentiality shall survive terminationof this Agreement.

 

10.3         Licenseeand its personnel shall have the right to publish and present data and findingsrelated to the research and development with respect to any Licensed Technologythat are not deemed trade secret, confidential, proprietary information and/orKnow-How, whether or not patentable subject to the approval of the Board ofManagers.

 

10.4         Neitherparty to this Agreement shall be deemed to be the agent or fiduciary of theother. Each party shall notify the other of any claim, lawsuit or otherproceeding relating to the Licensed Technology. MedQuest shall indemnify andhold harmless Licensee and each of its employees, officers, trustees and agents(the indemnified parties), from and against any and all claims, causes ofaction, lawsuits or other proceedings filed or otherwise instituted against theindemnified parties by third parties related directly or indirectly to orarising out of the Licensed Technology.

 

10.5         Thefailure of either party to enforce at any time any of the provisions of thisAgreement or any rights in respect hereto or to exercise any election hereinprovided shall in no way be considered to be a waiver of such provisions,rights or elections or in any way to affect the validity of this Agreement.

 

10.6         Ifany provision of this Agreement is judicially or in an arbitration proceedingdetermined to be void or unenforceable, such provision shall be deemed to beseverable from the other provisions of this Agreement which shall remain infull force 

 

----

 

and effect. Either party may request that a provision otherwise void orunenforceable be reformed so as to be valid and enforceable to the maximumextent permitted by law.

 

10.7         Noliability herein shall result to a party by reason of delay in performance causedby force majeure, i.e., circumstances beyond the reasonable control of thatparty, including without limitation, acts of God, fire, flood, war, civilunrest or labor unrest.

 

10.8         Theterms and conditions hereof and in the Licensee Operating Agreement and theExclusive Sublicense Agreement constitute the entire agreement between theparties with respect to the subject matter hereof and shall supersede allprevious agreements, whether oral or written, between the parties hereto withrespect to the subject matter hereof. No agreement or understanding bearing onthis Agreement shall be binding upon either party hereto unless it shall be inwriting and signed by the duly authorized officer or representative of each ofthe parties and shall expressly refer to this Agreement.

 

This Exclusive License Agreement shall be effective as of the date andyear first written above.

 
|   |   | LICENSEE                        |              |
|--------|--------|---------------------------------|-------------------|
|   |   | By:                             | Johan Crawford    | ** ** |   |
|   |   | Name: Johan Crawford            |              |
|   |   | Title: President of Chairman of |              |
|   |   | Board                           |              |
|   |   |                            |              |
|   |   | MEDQUEST PRODUCTS, INC.         |              |
|   |   |                            |              |
|   |   | By:                             | Pratap Khanwilkar | ** ** |   |
|   |   | Name: Pratap Khanwilkar         |              |
|   |   | Title: President                |              |
|        |        |                                 |                   |  |  |  |

 

----

 

EXCLUSIVE SUBLICENSE AGREEMENT

 

Between

 

Heart Lung Institute asSublicensor and MedQuest as Sublicensee

 

This Exclusive Sublicense Agreement (the Agreement) is made and enteredinto this              day of October, 1998, by and between the Heart Lung Institute, LLC (HLI) havinga principal place of business at 8th Avenue and C Street, Salt Lake City, Utah84143 and between MedQuest Products, Inc. (hereinafter “Sublicensee’),having a principal place of business at 825 North 300 Suite #107, SaltLake City, Utah 84103.

 

**Recitals**

 

A.            HLIis the Licensee of certain Licensed Technology, as defined below, pursuant tothe terms of the Exclusive License Agreement(*Maser LicenseAgreement)*entered into between MedQuest and HLI concurrently withthe execution of this Agreement;

 

B.            HLIis willing to grant to Sublicensee an exclusive, worldwide right and license,in the nature of a sublicense, of rights granted to HLI pursuant to the termsof the Master License, to utilize the Licensed Tecimology subject to the termsand conditions of this Agreement; and

 

C.            Sublicenseedesires to obtain such sublicense to use the Licensed Technology upon such termand conditions.

 

NOW THEREFORE, for and in consideration ofthe foregoing premises, the mutual covenants and agreements set forth below,and other good and valuable consideration, the receipt and sufficiency of whichare hereby acknowledged, the parties hereby expressly agree as follows:

 

**AgreementTerms**

 

1.             Definitions

 

1.1           Theterm “Licensed Technology” shall mean all technology, technical data, tradesecrets, inventions (whether patentable or not), designs, devices, models,know-how and other confidential and proprietary information relating tomagnetically suspended ventricular assist device (VADs) and the artificialheart (TAH), including all rights arising under patent, copyright, trademark,trade secret, and contract laws relating thereto during the term of thisAgreement.

 

1.2           Theterm “Patent Rights” shall mean any rights in applications for United Statespatents applications for foreign patents, any patents granted on United Statesor foreign applications, and any continuations, continuations-in-part,divisions, or reissues relating to the Licensed Technology, including patentapplication number 08/850,156 entitled “Electromagnetically Suspended andRotated Centrifugal Pumping Apparatus and Method” and patent application number08/850,598 entitled “Hybrid Magnetically Suspended and Rotated CentrifugalPumping Apparatus and Method”, and enhancements thereof which specificallyrelate to magnetically suspended impellers.

 

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1.3           Theterm “Field” shall mean the use of magnetically suspended impeller VADs and TAHtechnologies directed toward treatment of heart disease.

 

1.4           Theterm “Net Sales” shall mean the gross amount of monies or cash equivalent orother consideration which is paid by unrelated third panics to Sublicensee orits affiliates for the purchase of Licensed Technology by sale or other mode oftransfer, less all trade, quantity and cash discounts actually allowed, R&Dsales, credits and allowances actually granted on account or rejections,returns or billing errors, duties, transportation and insurance, taxes andother governmental charges actually paid. The term “Net Sales” in the case ofnon-cash sales, shall mean all equivalent consideration received by Sublicenseefor Licensed Technology.

 

1.5           Theterm “Sublicensing Revenue” shall mean the sublicensing fees, royalties andother payments and the cash equivalent or other consideration paid toSublicensee by sublicenses arising out of the sublicensing of the right tomake, have made, use or sell Licensed Technology in the field.

 

1.6           Theterm “Affiliates” shall mean any corporation, partnership, joint venture orother entity of which the common stock or equity ownership thereof is 10percent or more owned by Sublicensee.

 

1.7 The tem “Exclusive License Agreement” or “MasterLicense” shall mean the agreement that transfers the technologies from MedQuestto the HLI in exchange for HLI Units.

 

1.8           Theterm “Research Contract” shall mean the annual approved agreement between theHLI and MedQuest for the funding of the research, development, andcommercialization of the products incorporating Licensed Technology.

 

2.             Grant ofLicenses

 

HLI hereby grants to Sublicensee, andSublicensee accepts from the HLI, upon the terms and conditions, set forth inthis agreement, an exclusive right and license with the right to sublicense,make, use, sell, offer to sell, import, and export the Licensed Technology andPatent Rights to further research, development and commercialization of theLicensed Technology and the Patent Rights which may include productdevelopment, management, marketing and sales activities, (research, developmentand commercialization) of the Licensed Technology and Patent Rights in theField with the right, upon majority approval of the HLI Board of Managers, tosublicense, throughout the United States and the world subject to theconditions described in the HLI, LLC Operating Agreement Section 10.3.Sublicensee is not assuming by means of this Agreement, and HLI shall remainobligated to perform its obligations to Sublicensee arising under Sections 3,4, 6 and in the Master License Agreement.

 

3              SublicenceObligation

 

3.1           Aproposed Research Contract will be submitted by MedQuest to the HL by June 1stof each year that it is applicable and the HLI will review for approval saidResearch Contract by June 15th of that year to allow for disbursement offunds to begin by January 1st of the next calendar year. For the year1998, the Research Contract for the next fifteen month period will be submittedby MedQuest to HLI by October 22, 1998 for 

 

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review. Upon HLI’s approval of Research Contract, HLI will allow forthe disbursement of funds for the fourth quarter (4th) by November 5,1998.

 

3.2           Sublicenseeis obligated to complete the research, development, and commercialization ofthe Licensed Technology in the field and to make, have made, use, sell, leaseor otherwise market or dispose of Licensed Technology in the Field within areasonable period of time. The license granted hereby represents a sublicenseof HLI’s entire rights and interests arising under the Master License Agreementwith respect to the Licensed Technology and HLI retains no rights to exploitthe Licensed Technology except as specifically provided for herein.

 

4.             Consideration toHLI

 

4.1           Inconsideration of the license granted herein, and as long as products incorporatingLicensed Technology are commercialized by Sublicensee or its assignee,Sublicensee agrees to pay a quarterly royalty payment, in an amount asdetermined as set forth below, based on the amount of Funding (as defined inthe Master License - Agreement) provided by HLI to Sublicensee, as of thecommencement of the calendar quarter, to conduct the research, development andcommercialization of Licensed Technology. If the full three million dollarscommitted by IHC is not contributed to the Licensee, then the first steproyalty amount will be adjusted proportionally to the amount actuallytransferred. The royalty shall be equal to a percentage of the Net Salesactually received by Sublicensee during each calendar quarter during the termof this Agreement as follows:

 

**Table 1: Royalty Obligation PerFunding Provided**

 
| **Amount of $ paid by HLI to Sublicensee for R&D   and commercialization** | ** ** | **Percent Royalty (%)** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|
| $ 3,000,000                                                                                                                      |       |                              | 2.10 |
| $   3,000,001-$16,000,000                                                                                              |       |                              | 3.15 |
| $ 16,000,001-$26,000,000                                                                                                         |       |                              | 4.20 |
| $ 26,000,001-$36,000,000                                                                                                         |       |                              | 6.30 |
| $ 36,000,001-$46,000,000                                                                                                         |       |                              | 8.40 |
| $ 46,000,001-$56,000,000                                                                                                         |       |                              | 10.50 |

 

4.2           Sublicenseewill submit quarterly reports to the HL by the 20th of the month commencingafter the end of each quarter during the term of this Agreement, with such reportreflecting the Net Sales amount received by Sublicensee during such calendarquarter.

 

5.             Representationsof HLI

 

5.1           Sublicenseehereby represents to Licensee and Licensee hereby represents to Sublicensee:

 

(a) it is a corporation (or, in the caseof Licensee, shall take steps to become) duly organized, validly existing, andin good standing under the laws of its respective jurisdiction ofincorporation;

 

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(b) it has the power and authority toown, lease, and operate its assets and to carry on its activities as it is nowbeing conducted and has the full power and authority to enter into thisAgreement and to perform its obligations hereunder;

 

(c) the execution and delivery of thisAgreement and the performance by it of its obligations under this Agreementhave been duly and validly authorized and approved by all requisite action, andno other acts or proceedings on its part are necessary to authorize theexecution, delivery, and performance by it of this Agreement or thetransactions contemplated hereby;

 

(d) this Agreement constitutes itslegal, valid, and binding obligation and is enforceable against it inaccordance with its terms, except to the extent that enforcement may be limitedby general principles of equity, regardless of whether considered in aproceeding at law or in equity;

 

(e) no consent, approval,nondisapproval, authorization, ruling, order of, notice to, or registrationwith any governmental authority or any person, partnership, corporation, firm,trust, or other entity is required on its part in connection with the executionand delivery of this Agreement or the consummation by it of the transactionscontemplated hereby; and

 

(f) the delivery and performance of thisAgreement by it are not restricted by or in violation of any applicable law towhich it is subject or by any agreement, commitment, order, ruling, orproceeding to which it is a party or to which it or any of its assets aresubject.

 

6.             Details ofPayments

 

The royalty obligations described in Section 4 of this Agreement willbe administered in the following manner.

 

6.1           Royaltypayments will be due and payable within sixty (60) days from the calendarquarter to which they relate. The payment will be delivered or mailed to theoffice of the HL to the address noted in Exhibit F of the “OperatingAgreement”.

 

6.2           Royaltypayments shall be paid in United States dollars consistent with the laws andregulations controlling in the United States and/or any foreign country. If anycurrency conversion shall be required in connection with the payment ofroyalties hereunder, such conversion shall be made by using the exchange rateprevailing at the Chase Manhattan Bank (NA.) on the last business day of thecalendar quarterly reporting period to which such royalty payments relate.

 

6.3           Ifthe royalty payments set forth in this Agreement and amounts due under thisAgreement are not paid when due, then such overdue amounts will accrue interestcommencing thirty (30) days after the due date, and continuing until payment ismade, at a per annum rate of two percent (2%) above the prime rate in effect atthe Chase Manhattan Bank (N.A.) on the due date.

 

7.             Patents andInfringement

 

7.1           Includedwithin the Research Contract referred to in the Master License will be thedetails of the costs and expenses related to the filing, prosecution andmaintenance of United States and foreign patent applications with respect tothe Licensed 

 

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Technology and such responsibility to pay for these costs will not betransferred to Sublicensee hereunder. Sublicensee reserves the right tocomplete such protection mechanisms for the Licensed Technology as it maydetermine to be appropriate to protect the intellectual property rights of theLicensed Technology.

 

7.2           Ifit is believed in good faith that the Patent Rights or other intellectualproperty rights relating to the Licensed Technology are being infringed by athird party, the party to this Agreement first having knowledge of suchinfringement shall promptly notify the other in writing, which notice shall setforth the facts of such infringement in reasonable detail. Licensee shall havethe right, but not the obligation, to institute and prosecute at its ownexpense any such infringement of the Patent Rights or other intellectualproperty rights. If Licensee fails to bring such action or proceedings within aperiod of three (3) months, after receiving written notice or otherwisehaving knowledge of such infringement, then Sublicensee shall have the right,but not the obligation, to institute and prosecute at its own expense any suchinfringement of the Patent Rights or other intellectual property rights.Recovery of damages and costs in such suit shall be apportioned as follows: Theparty bringing the suit shall first recover an amount equal to two (2) timesthe cost and expense incurred by such party directly related to the prosecutionof such action and the remainder shall be divided equally between MedQuest andHLI.

 

8.             Termination

 

8.1           Unlessearlier terminated as provided herein, with respect to the Patent Rights, thisSublicense Agreement shall extend for the life of the last to expire patentissued on the Patent Rights and shall then expire automatically. With respectto the Licensed Technology other than the Patent Rights this Agreement shallcontinue in full force and effect for a period of twenty (20) years from thedate of this Agreement. Notwithstanding this clause, the royalty paymentsassociated with the Exclusive Sublicense Agreement will continue as long asproducts incorporating Licensed Technology are being commercialized.

 

8.2           Inthe event of the default or failure by either party to perform any of theterms, covenants or provisions of this License Agreement, the non-performingpatty shall have sixty (60) days after the giving of written notice by theother party of such default within which to correct such default. If suchdefault is not corrected within the said 60- day period after notice, theperforming party shall have the right at its option to cancel and terminatethis License Agreement in the event that the other party shall become involvedin insolvency, dissolution, Chapter 7 bankruptcy or receivership proceedingsaffecting the operation of its business or in the event that the other partyshall discontinue its business for any reason. In the event of termination ofthis License Agreement except pursuant to paragraph 7.1, all rights licensedherein will be vested in the performing party.

 

8.3           ThisAgreement shall automatically terminate in the event of a liquidation orwinding up of Sublicensee.

 

----

 

9.             Assignability

 

This Sublicense Agreement shall be binding upon and inure to thebenefit of HLI, L.L.C. and its assignees and successors in interest and shallbe binding upon and inure to the benefit of Sublicensee and any successor toits entire business but shall not otherwise be assignable or assigned by eitherparty without prior approval of the other party being first obtained inwriting, which approval shall not be unreasonably withheld.

 

10.           Governing Law

 

This Agreement shall be construed according to the laws of the State ofUtah and any and all disputes hereunder shall be resolved in the appropriatestate or federal courts sitting in the State of Utah. The parties hereto agreeto the jurisdiction of, and to venue in, such courts.

 

11.           AdditionalProvisions

 

11.1         Theparties hereto agree that neither will use the names of the other on any logotype or symbol associated with any publication, research, promotion, marketingsale or advertisement in connection with the Licensed Technology without theprior written consent of the other.

 

11.2         Theparties agree that the Licensed Technology to which this Agreement relates isconfidential and each party agrees to use reasonable efforts to maintain theconfidentiality of non-public information and to maintain the subjecttechnology i confidence and to use the same only in accordance with thisAgreement. Such obligations of confidentiality shall not apply to informationwhich either party can demonstrate: (i) was at the time of disclosure inthe public domain; (ii) has come into the public domain after disclosurethrough no fault of such party; (iii) was known to such party prior todisclosure thereof by the other party; or (iv) was lawfully disclosedwithout obligation of confidence by a third party which was under no obligationof confidence. The foregoing obligations of confidentiality shall survivetermination of this Agreement.

 

11.3         Sublicenseeand its personnel shall have the right to publish and present data and findingsrelated to the research and development with respect to any Licensed Technologythat are not deemed trade secret, confidential, proprietary information and/orKnow-How, whether or not patentable.

 

11.4         Neitherparty to this Agreement shall be deemed to be the agent or fiduciary of theother. Each party shall notify the other of any claim, lawsuit or otherproceeding relating to the Licensed Technology. Sublicensee shall indemnify andhold harmless HLI and each of its employees, officers, trustees and agents (theindemnified parties), from and against any and all claims, causes of action,lawsuits or other proceedings filed or otherwise instituted against theindemnified parties by third parties related directly or indirectly to orarising out of the securing of the funds to complete the research, developmentand commercialization as described herein or any other embodiment of thesubject technology by Sublicensee even though such claims, causes of action,lawsuits or other proceedings and the costs (including attorneys fees) relatedthereto in whole or in part from the conducts of any of the indemnifiedparties.

 

11.5         Thefailure of either party to enforce at any time any of the provisions of thisLicense Agreement or any rights in respect thereto or to exercise any electionherein 

 

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provided shall in no way be considered to be a waiver of suchprovisions, rights or elections or in any way to affect the validity of thisLicense Agreement.

 

11.6         Ifany provision of this Exclusive Sublicense Agreement is judicially or in anarbitration proceeding determined to be void or unenforceable, such provisionshall be deemed to be severable from the other provisions of this LicenseAgreement which shall remain in full force and effect. Either party may requestthat a provision otherwise void or unenforceable be reformed so as to be validand enforceable to the maximum extent permitted by law.

 

11.7         Noliability herein shall result to a party by reason of delay in performancecaused by force majeure, i.e., circumstances beyond the reasonable control ofthat party, including without limitation, acts of God, fire, flood, war, civilunrest or labor unrest.

 

11.8         Theterms and conditions hereof and as referenced to the HLI “Operating Agreement”and the “Exclusive License Agreement” between MedQuest and the HLI constitutethe entire agreement between the parties and shall supersede all previousagreements, whether oral or written, between the parties hereto with respect tothe subject matter hereof No agreement or understanding bearing on this Agreementshall be binding upon either party hereto unless it shall be n writing andsigned by the duly authorized officer or representative of each of the partiesand shall expressly refer to this Agreement.

 

This Exclusive Sublicense Agreement shall be effective as of the dateand year first written above.

 

 
|   |   | HLI                             |              |
|--------|--------|---------------------------------|-------------------|
|   |   | By:                             | Johan Crawford    | ** ** |   |
|   |   | Name: Johan Crawford            |              |
|   |   | Title: President of Chairman of |              |
|   |   | Board                           |              |
|   |   |                            |              |
|   |   | MEDQUEST PRODUCTS, INC.         |              |
|   |   |                            |              |
|   |   | By:                             | Pratap Khanwilkar | ** ** |   |
|   |   | Name: Pratap Khanwilkar         |              |
|   |   | Title: President                |              |
|        |        |                                 |                   |  |  |  |

 

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Exhibit B

 

“Excluded Activities” mean thosebusiness activities and opportunities of each Member that are not subject tothe restrictions of the noncompetition provision set forth in Section 2.6hereof as pertaining to Foundation.

 

Exhibit C

 

“Excluded Activities”mean those business activities and opportunities of each Member that are notsubject to the restrictions of the noncompetition provision set forth in Section 2.6hereof as pertaining to MedQuest Products, Inc.

 

A.            Allother products, services and technologies currently or that may be included inthe future in MedQuest Products Inc. excluding the Included Activities in Article 1.

 

(i) Coating technology for example asdisclosed in U.S. patent application number 08/846,268 entitled “ElectrosurgicalKnife with Nonstick Coating” and PCT application number PCT/US97/09506 with thesame title and U.S. patent application number 09/071,371 entitled “Method andApparatus For Providing a Conductive Amorphous Non-Stick Coating” and anycontinuations, continuations-in-part, divisions, or reissues relating to theabove listed patents are not included in the term Licensed Technology. However,if patent rights relating to this patent are incorporated into any productincorporating the Licensed Technology in the Field, MedQuest shall license suchrights in the said patent to the Company as set forth in Exhibit F,attached hereto and by this reference made a part hereof.

 

B.            Anyproducts or services that MQP has contracted with NIH, MicroMed TechnologiesInc., Apex Medical, and other customers in the future that may be in themedical products field.

 

C.            VentricularAssist devices and/or total artificial heart that specifically do not useMagnetically suspended impellers.

 

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Exhibit D

 

Prior to August 1, 1998, the Foundation has made monetarycontributions in the amount of $942,053, or which $830,153 has been paid toMedQuest and $111,900 has been paid directly to the University of Virginia giftaccount. It is the intent of the Foundation to contribute up to an additional$2,051,947 to the Company. It is intended that a portion of the funding will beallocated to the Utah Artificial Heart Program under a separate agreementsubject to approval by the Board of Managers. The Foundation also agrees to usereasonable efforts to raise additional funds to contribute to the Company.MedQuest is not obligated to accept any contributions, it is intended that anysuch additional contributions shall be made according to the Proposed BudgetEstimate shown in Exhibit D, Table 1. The Foundation shall have the right,but not the obligation, to contribute additional amounts to the Company butonly with the consent of all of the Board of Managers.

 

**Table I Proposed Schedule of Estimated Funding Required forCommercialization**

 
| **YEAR** | ** ** | **VAD  BUDGET** | ** ** | **VAD  STATUS** | ** ** | **TAH  BUDGET** | ** ** | **TAH  STATUS** | ** ** | **COMBINED  BUDGETS** | ** ** | **CUMULATIVE  BUDGETS** | ** ** |
|----------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------------|------------|-------------------------|------------|
| 1997     |       | 400,000         |       | R&D         |       | 0               |       |            |       | $                     | 400,000    |                    | $          | 400,000 |   |
| 1998     |       | $               | 3,290,144  |            | R&D    |            | 0          |            |       |                  | $          | 3,290,144               |       | $ | 3,690,144 |   |
| 1999     |       | $               | 4,412,229  |            | R&D    |            | $          | 591,559         |       | R&D               |       | $                       | 5,003,788  |   | $ | 8,693,932 |   |
| 2000     |       | $               | 5,859,605  |            | R&D    |            | $          | 1,460,042       |       | R&D               |       | $                       | 7,319,647  |   | $ | 16,013,579 |   |
| 2001     |       | $               | 5,510,998  |            | IDE        |            | $          | 3,180,287       |       | R&D               |       | $                       | 8,691,265  |   | $ | 24,704,844 |   |
| 2002     |       | $               | 6,352,544  |            | IDE        |            | $          | 3,349,120       |       | IDE                   |       | $                       | 9,701,664  |   | $ | 34,406,508 |   |
| 2003     |       | $               | 6,921,721  |            | PMA        |            | $          | 3,572,982       |       | IDE                   |       | $                       | 10,494,703 |   | $ | 44,901,211 |   |
| 2004     |       | $               | 7,508,744  |            | PMA        |            | $          | 3,563,306       |       | PMA                   |       | $                       | 11,072,050 |   | $ | 55,973,261 |   |
| TOTAL    |       | $               | 40,255,985 |            |       |            | $          | 15,717,276      |       |                  |       | $                       | 55,973,261 |   | $ | 55,973,261 |   |
|     |       |            |       |            |       |            |       |            |       |                  |       |                    |       |   |   |   |   |

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R&Dmeans research and developmentIDE means Investigational Device Exemption for limited clinical trials aspermitted by the FDAPMA means the Premarket Approval for nationwide sales for clinical use asgranted by the FDA

 

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Exhibit E Member Addresses

 

MedQuest Products, Inc.825 North 300 West Suite 107Salt Lake City. UT 84103

 

The Heart & Lung Research FoundationLDS Hospital8 Ave & C StreetSalt Lake City, UT 84143

 

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